While high street retailing struggles, Asos has expanded relentlessly. The online fashion retailer is delivering levels of growth that most bricks-and-mortar retailers can only dream of.
Asos is partly responsible for the high street crisis. The attractions of websites such as its own have prompted shoppers to eschew visits to shops in favour of online ordering and delivery. Asos often offers cheaper prices and a wider range of goods.
The business was founded in north London in 2000 by Nick Robertson, its former chief executive, and his brother, an entrepreneur, with a small amount of seed capital provided by Andrew Regan, the financier. It listed on Aim the following year for 20p a share and with a valuation of £12 million. Today the retailer has 18.4 million customers and employs almost 4,400 people. It manages distribution warehouses in Barnsley and Berlin and is developing a site in Atlanta to serve the American market. It ships its goods from its main warehouses to almost 240 countries and in the year to the end of August it made pre-tax profits of £102 million on revenues of more than £2.4 billion.
Asos’s core target market is twentysomething shoppers and it specialises in “fast fashion” — lines that come in and out of favour swiftly and sell strongly before the fashionistas move on. It sources its products from 168 suppliers, selling well-known brands as well as own-label clothing.
It is the big player in the Alternative Investment Market, with a market value of £4.64 billion. If it were to switch to the main market it probably would qualify for membership of the FTSE 100, with Asos being more valuable than Royal Mail, Rightmove and Direct Line, the insurer. The company has indicated that it is happy where it is, though, and does not need the extra trading liquidity or wider shareholder reach, with half of its investor base in the US. Under Aim rules, Asos shareholders qualify for relief from inheritance tax of 40 per cent as long as they own the stock for two years.
Asos has growth potential thanks to the rise in online shopping and its relatively low market share in its core markets, such as Britain, and its target countries, including America. The bigger it gets (Asos is talking already about potential annual sales of £4 billion), the more benefits it can produce in terms of bulk-buy discounts and economies of scale.
Asos claims a 7.4 per cent share of the online clothing market in the UK, which it expects to grow at a compound annual rate of 8 per cent between now and 2023. In the US its share is 0.5 per cent, but it predicts compound annual growth of 11 per cent there over the same period.
Investing is not without risks. Asos remains largely untested in the American market. A sizeable amount of its orders are returned and, while it does not disclose how much, the figure is thought to be high — for Zalando, a German rival, for example, it is 50 per cent. In some countries, including Britain, the company bears the cost of sending items back. Where once Asos was streets ahead of the competition, the threat from rivals is rising the likes of H&M improve their online offerings and Amazon makes more inroads.
Asos shares trade at more than 55 times earnings. The company pays no dividend, choosing instead to invest in growth, spending a record £242 million in its 2018 financial year and signalling more to come. The shares, down 224p to £53.44 yesterday, are well below their peak of £77.30 this year, after falling amid fears that the hot summer would dent sales. Those fears proved unfounded. Investing in Asos is a risk, but one worth taking.
ADVICE Buy
WHY The opportunities for growth, both geographically and in online shopping, are too significant to ignore
Applegreen
Applegreen is an expanding petrol forecourts retailer that last week completed a deal to take a majority share in Welcome Break, the motorway service stations. Its previous name of Petrogas may have been more apt, but as a business it is far more preoccupied with selling goods from the convenience stores on its sites rather than fuel for motorists, which probably explains the consumer-friendly name adopted in 2005.
Founded as a single service station in west Dublin in 1992, it owns and operates 368 sites, half of them in the Republic of Ireland with a further 112 in the UK and 72 in the northeastern United States. The group’s strategy is to buy and develop sites in each of these three markets and its sells its own-brand food and drinks at its convenience stores, which also have partnership arrangements with third-party retailers including Subway, Costa Coffee and Burger King.
The retailer agreed to buy a 50.1 per cent stake in Welcome Break from its private investor owners for €361.8 million in August, part-paid-for with a €175 million share placing at €6.08, a slight discount to its London-listed share price yesterday, down 12p at 546p. The shares are also listed in Ireland, where they closed down a touch at €6.16.
The majority ownership in Welcome Break gives Applegreen control of 24 motorway service stations, two trunk road sites and 29 hotels in Britain, a clearly transformative deal for its presence in the UK market. The group generates by far the majority of its revenues, more than €682 million in the first half, from low-margin fuel sales, which gave it €38.7 million in gross profits over the period. Profits from food sales reached €37.1 million over the same period, on revenues of only €62.6 million.
Applegreen’s continuous acquisition strategy, often involving small, family-owned forecourt retailers, means that it is far more likely to plough the cash it generates back into the business rather than on doling out big dividends to shareholders. The shares trade on a multiple of nearly 28 times last year’s earnings for a meagre yield of 0.2 per cent. The company is an attractive one, but the share price is unappealing.
ADVICE Avoid
WHY It is clearly going places, but the shares are richly valued
Keep up to date by getting our Times Business Briefing email newsletter sent straight to your inbox at 8am and lunchtime: go to https://home.thetimes.com/myNews and tick the business box